Private banks' yields on advances dip on faster rate transmission
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MUMBAI: Private sector banks have been quicker than their public sector counterparts in passing on the Reserve Bank of India's policy rate cuts to borrowers.Yields on loans for private banks dropped by 20-83 basis points (bps) in the quarter ended June 30 from three months prior. For public sector banks (PSBs), the decline was limited to 2-22 bps, based on the quarterly financial statements of banks.The central bank has cut policy repo rate by 100 basis points since February, with three-fourths of this reduction being done in the April-June period.Private banks recorded a sharper fall, primarily because they have a higher share of loans priced on the external benchmark linked rate (EBLR) in their portfolio. EBLR adjusts more rapidly to policy changes than the marginal cost of funds-based lending rate (MCLR), the benchmark that most PSB loans are linked to.Nearly 87% of private banks' floating rate loans are on EBLR as of the end of March 2025, compared with 46% for state-run banks, according to the RBI data. The share of loans linked to MCLR, where transmission works with lag effect and depends on the fall in incremental cost of deposits, is 12% for private banks and 49% for PSBs.Private banks also saw a 0-20 bps decline in deposit costs during the quarter, whereas PSBs reported a relatively modest drop of 6-15 bps, the June-quarter numbers showed.At HDFC Bank , the cost of funds fell by about 10 bps, while loan yields declined by 20-22 bps. About 70% of the loan book of the country's largest private sector bank is linked to EBLR; the remaining is MCLR-based."These (EBLR-based) are floating-rate loans, so they reprice faster than the cost of funds," said HDFC Bank chief financial officer Srinivasan Vaidyanathan. "We manage our cost of funds by competitively pricing our savings and time deposits. The market hasn't fully priced in the 100-bps reduction in the policy rate between February and June. New deposit renewals will come in at lower rates." ICICI Bank reported a 33-bps sequential drop in loan yields to 9.53%. Axis Bank 's cost of funds came in at 5.39%, down 11 bps quarter-on-quarter and five bps year-on-year. The cost of deposits declined by 12 bps, while loan spreads narrowed by 13 bps."We've demonstrated disciplined increases in cost of funds over the last eight quarters," Axis Bank managing director and chief executive Amitabh Chaudhry said. "Our confidence in the franchise has allowed us to take proactive steps on savings and term deposit rates, resulting in an 11-bps sequential drop in cost of funds." Yes Bank saw its loan yields decline by 20 bps sequentially to 9.9%, with a corresponding fall in deposit costs to 5.9%. The bank's overall cost of funds fell by 10 bps to 6.3%. "The rate cut we implemented on savings account balances helped us align our deposit costs with the decline in loan yields," MD and CEO Prashant Kumar said, adding: "While we expect continued pressure on loan yields due to the repo rate cut, our focus remains on mitigating the impact."According to Saurabh Bhalerao, associate director at CareEdge Ratings, while private banks are seeing upfront pressure on margins mainly because of EBLR loans and competition, it will play out over the next two-three quarters for PSBs as MCLR rates fall with a lag. "Banks would try to make up for the pressure on NIMs (net interest margins) by managing the spreads as well as the cost of funds," he said.
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